To ensure timely payments to the Micro, Small and Medium Enterprises (MSME) sector, a new regulation will be implemented from April 1. This regulation requires companies to settle their dues with MSMEs within 45 days. Non-compliance will lead to a tax liability on the overdue amount.

The Finance Act 2023 introduced an amendment to the Income Tax Act by adding clause (h) to Section 43B. This clause stipulates that any payments owed to MSMEs, not resolved within 45 days, will not qualify for tax deductions until the payment is made. The aim is to motivate larger entities to prioritize their settlements with MSME counterparts, thereby promoting a more robust economic environment for these smaller businesses.

Section 43B (h) is applicable to transactions that involve the purchase of goods or services from enterprises registered under the MSMED Act, 2006.

Section 43B (h) of the Income Tax Act, introduced in 2023, aims to ensure timely payments to Micro, Small and Medium Enterprises (MSMEs). Here's a breakdown of what it means for you:

What it does? This section disallows businesses from claiming deductions for expenses incurred towards goods or services purchased from MSMEs if the payment is delayed beyond a specific timeframe. In simpler terms, if you don't pay an MSME on time, you can't deduct that expense from your taxable income, potentially increasing your tax liability.

In India, businesses typically record expenses as they occur (accrual basis), regardless of whether the payment has been made. However, Section 15 of the MSMED Act, 2006, alongside the newly introduced Section 43B (h) of the Income Tax Act, mandates that businesses must settle their dues with MSME Registered Enterprises within 15 days, or up to 45 days under a mutual agreement.

Starting from April 1, companies, sole proprietorships, partnerships, or LLPs, are required to pay their suppliers registered as MSMEs within 15 days, or up to 45 days under an agreement.